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VoIP in the Crosshairs

Voice over Internet protocol has dodged state regulation so far, but several states have the emerging telecom technology in their sights.

There's little question voice over Internet protocol (VoIP) is mature enough to be a communications option in the mass market. Now states are confronting the issue of regulating new services that straddle the line between Internet information and traditional telephone service.

VoIP was once considered too unreliable for voice communications. But in late 2003, several cable television powerhouses -- including Cablevision, Time Warner Cable and Comcast -- said they were prepared to offer Internet-based telephone services to their cable customers. Traditional telecom heavyweights, such as AT&T, also jumped into the VoIP market, using DSL as a delivery mechanism.

No matter the medium, VoIP will likely attract customers interested in bundled services from telecom providers. As VoIP providers gain momentum, battles over states' regulatory reach have begun. On one side, state public utilities commissions (PUC) argue VoIP providers do business as telephone companies, so they should be subject to the same regulatory fees and rules as traditional phone companies.

On the other hand, VoIP providers contend they provide information services, not telecommunications services, and don't fit under PUC regulatory schemes. So far, their argument is winning. VoIP providers prevailed in one case against a state PUC, and the FCC appears to be leaning toward little regulation.

At stake are hundreds of thousands of dollars in fees to state PUCs and the threat of stifling technology that may revolutionize telecommunications, according to some participants.


First Salvos
Last August, Minnesota's PUC declared that VoIP was subject to the same rules and regulations that govern traditional telephone service. The PUC targeted Vonage, one of the nation's biggest VoIP providers, ordering the company to obtain business licenses similar to those required for traditional phone companies, and to immediately start paying fees to the Minnesota Department of Administration to support 911 services.

Vonage challenged the ruling, and in early October, a Minneapolis federal judge sided with the company, barring the PUC from forcing the firm to abide by traditional telephone regulations. The PUC didn't appeal and concluded its proceedings against Vonage a few days after the ruling.

Still, the Minnesota PUC's defeat didn't deter Wisconsin and California PUCs from announcing their intent to regulate VoIP providers.

In September 2003, Wisconsin's Public Service Commission (PSC) told California-based VoIP provider 8x8 the company couldn't provide VoIP services in Wisconsin without the PSC's approval, and declared the company's bills for voice calls in the state void. Wisconsin sent similar letters to other VoIP providers, a PSC spokeswoman said.

"Currently staff is in a fact-finding stage on the issue of VoIP," said Linda Barth, the Wisconsin PSC's public information officer, in mid-December. "It is staff's intent to continue to collect information on VoIP and to monitor FCC activities. We are not at a point in our process to make further comments about regulation of VoIP."

In a letter dated Sept. 22, 2003, California's PUC told Vonage to obtain a telephone operator's business license by the end of October. The agency sent the same letter to five other VoIP providers.

"Section 234 of the California Public Utilities Code defines a telephone corporation as every corporation or person who owns, controls or manages a telephone line for profit," the California PUC's letter said. "Section 233 defines a telephone line as any asset used to facilitate telephone communication. Section 216 states that any telephone corporation that performs compensated service to any portion of the California public is a public utility. Section 1,001 requires that a telephone corporation must first be certificated by the commission to place a telephone line into service."


Defending Their Turf
Matt Deatrick, vice president of retail sales for Vonage, said the traditional regulatory approach simply doesn't work in today's world. He contended that Vonage delivers data services, not telecommunications services because the company doesn't terminate -- or connect -- telephone calls between two people.

"We've been successful in making this look just like regular phone service," he said. "This is the beginning of a transformation a lot of people don't get yet. The fact that I can take this IP phone we're talking over right now, go to India, plug it into an Ethernet connection, and there's my 732 Edison phone, is a significant change. It blows away literally all the existing hierarchies, levers and control methodologies in place."

This rationale is apparent in the court decision freeing Vonage from Minnesota's regulatory reach, a ruling that leaned heavily on existing FCC regulations and definitions for telecommunications and information services.

The key point is what happens to the call itself.

"The process of transmitting customer calls over the Internet requires Vonage to 'act on' the format and protocol of the information," wrote U.S. District Court Judge Michael Davis. "For calls originating with one of Vonage's customers, calls in the VoIP format must be transformed into the format of the PSTN [public switched telephone network] before a POTS [plain old telephone system] user can receive the call. For calls originating from a POTS user, the process of acting on the format and protocol is reversed. The Court concludes that Vonage's activities fit within the definition of information services."


Legal Matters
Andrew McLaughlin, a senior fellow at Harvard Law School's Berkman Center for Internet & Society, said the Minnesota decision centered on two key legal questions: Are VoIP services considered information services, which are not subject to regulation under federal law, or telecommunications services, which are? And does the federal Telecommunications Act pre-empt Minnesota's decision?

"Judge Davis basically concludes that there's no congressional authorization for states to go out and regulate [VoIP providers]," McLaughlin said. "It's the purview of the FCC. State laws are pre-empted, and only the FCC, or a further act of Congress, could give states the authority to regulate.

For now, the decision applies only to Minnesota, McLaughlin said. Even if the ruling is upheld by a federal appellate court, it would bind only the Midwestern states covered by the Eighth Circuit Court of Appeals.

Still, Davis' decision was well reasoned, McLaughlin said, and most judges would likely find the ruling persuasive in similar cases. The FCC also could prohibit states from regulating VoIP providers.

"My sense is if [FCC] Chairman [Michael] Powell sees many different states preparing to pass different or potentially inconsistent regulations of VoIP, that would be an excellent reason for the FCC to pass its own set of pre-emptive regulations that would probably be a lot less burdensome than the ones states are considering," he said.

The agency has already taken steps in that direction. In December 2003, the FCC convened a VoIP Forum to examine issues VoIP creates for regulators.

In February, the FCC ruled that pure VoIP providers -- those offering PC-to-PC calls -- are exempt from state regulation. But the FCC said a separate proceeding will be needed to assess whether providers like Vonage, which offer PC-to-telephone calls, are subject to state regulation.

States' desire to license VoIP providers the same way as traditional phone companies illustrates the fundamental conflict between the new world of telecommunications and the old, according to McLaughlin.

"In the Internet world, packets are packets are packets," he said. "All data carried in packet form is the same, whether it's voice, pictures, e-mail, Web pages or whatever. It all looks the same to the Internet. That's the way the FCC has been viewing it -- things that are carried in packet format are information, rather than telecommunications, services.

"From the standpoint of the public utilities commissions, they look at this, and they say, 'It's voice service over a contraption that I bought to use as a telephone,'" he continued. "From their perspective, it looks exactly like phone service, feels like phone service and acts like phone service, even though it's being carried in a different form over a different network to the end-user."


High Stakes
Accompanying the philosophical battle over what is subject to state regulation is a practical side effect: revenue. If states can regulate VoIP providers, PUCs can levy fees on companies like Vonage to cover contributions to enhanced 911 services, the Universal Service Fund and other funds that traditional telephone companies pay into.

PUCs argue VoIP providers shouldn't avoid those fees simply because they packetize voice traffic instead of sending it over the PSTN, McLaughlin said.


"People like me think packetizing the traffic makes all the difference in the world," he said. "The states' PUCs' reasoning leads to a kind of false view of the Internet -- that different services on the Internet can be disaggregated and regulated differently; that you could regulate voice packets differently from picture packets differently from movie packets differently from e-mail packets. It just doesn't work like that.

"Of course, you can regulate companies and what they do, but I don't see Vonage as a telephone company," McLaughlin added. "I see Vonage as a supplier of boxes that convert traffic. Vonage, if it wants to interconnect into a local phone system to terminate my traffic to your area code, has to play ball with the phone company and pay the access fees and so forth just like anybody else. It's not like Vonage is somehow immune from regulation. It can always be regulated at the point at which its traffic enters the PSTN."


California Takes a Breath
In early January, California's PUC delayed its attempts to regulate VoIP until more information was collected and studied.

"We're opening up an investigation, a more formal and deliberative process," said California PUC Commissioner Susan Kennedy. "That means hearings and comments, and more of an investigation. There will be an opportunity for a much more thorough discussion about what VoIP is, how it should be treated and the position California should take."

That should take 12 to 18 months, Kennedy said, adding that the California PUC's Telecommunications Division jumped the gun in September 2003 by telling VoIP providers they needed to apply to the California PUC for "authority to conduct business as a telecommunications utility."

California's five-member PUC is divided over whether VoIP is an information or telecommunications service, and whether the PUC has the power to regulate it. Kennedy said three commissioners consider VoIP a telecommunications service, one is undecided and she does not think the old regulations fit.

"VoIP is a different animal," Kennedy said. "We're now in a world where definitions are no longer clear. We're merging information and voice services to such a degree that it really is a Rorschach test -- you can see whatever you want."